What Happens When a Business Doesn't Pay Sales Tax
If you are wondering what happens when a business doesn't pay sales tax, you are not alone. There is a common misconception that the IRS will immediately barge into such businesses, demanding prompt payment. Others assume state government representatives will immediately freeze the business’s bank accounts.
Here’s a quick look at what happens when a business doesn't pay sales tax.
Common Ways Businesses are Non-Compliant with Their Sales Tax
Failing to pay sales tax is not the only way in which businesses violate sales tax law. As detailed below, there are several other ways small business owners break sales tax laws and rules.
Failure to Register for a Sales Tax Permit
Every business that sells taxable services and goods is required to register for a sales tax permit, also known as a certificate. If you do not have a sales tax permit, contact your state revenue department for guidance. Though obtaining such a permit will likely be free, there are some states that charge a minor fee. Be sure to have your business’s Employer Identification Number (EIN) on-hand along with other relevant business details to expedite the process.
Collecting Sales Tax but not Remitting It
Collecting sales tax is not enough. Your business must also remit the collected tax to the government. Fail to remit the collected sales tax and you’ll be forced to pay back taxes, pay fines and face additional punishment as detailed below. The amount of sales determines the frequency of the state or municipal tax collection.
For the most part, sales tax is collected on a monthly or quarterly basis. Even if you do not sell a wide variety of goods and have low sales volume, it is in your interest to lean on an outside sales tax specialist to guide you through the process, ensuring full compliance.
Underreporting Sales
Every single sale that falls under the sales tax umbrella must be taxed accordingly. Document all sales including sales tax for those sales including all invoices and you’ll make it that much easier for your outsourced tax professional to fulfill your sales tax obligations.
Keep in mind, some state and municipal governments request sales tax receipts from sales so keep all relevant paperwork. Abide by the state’s schedule for reporting sales tax including the process for reporting to avoid penalties including criminal charges.
Charging Incorrect Sales Tax Rates
The sales tax rate in your state isn’t the same as that in other states. Every business owner and manager should be aware of their state’s exact sales tax rate and collect that percentage from each applicable sale. If you are uncertain as to what the state’s sales tax rate is, reach out to the state’s revenue agency for information.
Moreover, we would be remiss not to mention that municipalities can also charge sales tax. It is even possible for sales tax rates to differ based on the unique services and goods sold by your small business.
Failing to File Sales Tax Returns
Fail to file your business’s sales tax returns and you’ll inevitably be audited. As detailed below, failing to file the sales tax return also has the potential to lead to civil and criminal charges including potential jail time. Some states have misdemeanor criminal charges on the books for business owners who refuse to file their company’s sales tax returns.
What Happens If a Business Doesn’t File Taxes
Contrary to popular opinion, it is not uncommon for a small business to sidestep filing sales tax returns. Small business owners tend to be in favor of small government and private industry, meaning they aren't exactly enthusiastic about paying Uncle Sam his cut. However, there are consequences when a business refuses to pay sales tax.
Fail to pay sales tax and your small business will likely face a sales tax audit. Though such an audit might not immediately occur after tax season ends, it will likely occur in the months or years that follow the failure to pay sales tax. The bottom line is collecting sales tax and failing to forward that money to the state is a crime.
The audit process begins with a warning letter in which the business in question is notified of its failure to pay sales tax. Interest is added to the unpaid sales tax as a punitive measure.
Civil Implications
The failure to pay sales tax to the state government leads to civil penalties. Aside from the addition of interest on the unpaid sales tax, there might also be a standard rate penalty added in accordance with local regulations.
Criminal Implications
The worst possible outcome of not paying sales tax is a criminal penalty. Criminal penalties are applicable to business owners that knew they owed sales tax and kept the collected sales tax for the benefit of the enterprise. Moreover, generating fake or inaccurate sales paperwork has the potential to spur criminal penalties. Such penalties have the potential to be quite harsh simply because the business owner refused to pay tax owed to the government as opposed to merely missing a deadline.
Lawsuit
It is possible for a business that failed to pay its sales tax to face legal action in the form of a lawsuit. The company itself is sued, potentially leading to a ruling that results in a punitive fine and interest added onto the unpaid sales tax owed. Moreover, lawsuits are expensive in that they require the guidance of a seasoned tax law attorney for representation in and out of court.
Add in the fact that a lost sales tax lawsuit will compromise the company’s standing in the community and there is all the more reason to outsource your sales tax responsibility to an expert. However, if you can prove your business mistakenly missed the sales tax payment deadline or there was an unintentional paperwork error, you will likely win the lawsuit.
Benefits of Outsourcing Sales Tax
Sales tax calculations, tax forms and deadlines are inherently challenging to complete with 100% accuracy. Instead of adding to your existing workload, lean on the outside experts to handle everything sales tax-related on your behalf. As is often said, the best possible way to solve a complex problem is to ask those who are in the know. Outsource your business’s sales tax to the experts who understand sales tax rules, regulations and laws and you’ll be liberated to focus on your strengths as a business owner or manager.
Agile Consulting is here to help your business operate like a well-oiled machine and in full compliance with tax laws.
We align business’s tax and accounting systems with the law to maximize all relevant sales tax exemptions.
Contact us today to learn more about how we can help your business. You can reach us at (888) 350-4TAX or by email at info@salesandusetax.com
